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What Every Investor Should Know About Opportunity Funds

What are Opportunity Funds?

An Opportunity Fund is a new tax-advantaged investment vehicle created by the Investing in Opportunity Act - part of the tax reform passed in late 2017. The goal is to help spur greater private-sector investment in targeted communities across the country called Opportunity Zones.

What are opportunity zones?

Opportunity Zones are designated census tracts selected by the state and federal governments for economic development. Opportunity Zones can be found in every state and in urban, suburban and rural areas.

Why invest in an Opportunity Fund?

Qualifying investments offer three unique and compelling tax advantages - investors can defer paying federal capital gains tax from recently sold investments until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on their Opportunity Fund investment if held for 10+ years. Investors can also help spur economic growth in historically underinvested neighborhoods.

What kind of gains are eligible for tax deferral?

Investors may defer capital gains tax on any recently sold investment – including the sale of stocks, bonds or real estate – so long as those gains are rolled over into an Opportunity Fund investment within 180 days of sale.

How can I invest?

The final tax regulations are expected before the end of 2018. In the interim, EquityMultiple is focused on identifying the right real estate partners, strategies and properties. Sign up to be notified when eligible investments become available.

How It Works

1

Defer

Roll over capital gains, don't pay tax on them until 12/31/2026.

2

Reduce

Hold for 7+ years, and reduce the deferred tax you owe by 15%.

3

Pay zero

Pay $0 in taxes on an Opportunity Fund held for 10+ years.

An Example

When Amazon hits $2,000 per share, John decides to sell the 600 shares he purchased back in 2015. The sale results in a $1 million profit and $238,000 in federal tax liability. Instead of paying $238,000 in federal taxes on this sale, John invests his $1 million gain into a real estate Opportunity Fund targeting workforce housing in Opportunity Zones. Assuming an annual return rate of approximately 8.5%, the post-tax value of his investment in 2028 - after a 10-year hold - is $2 million. John’s post-tax earnings are more double than if he had invested elsewhere.

Breakdown of Key Investor Tax Benefits

Deferral

Investing $1 million in pre-tax dollars instead of the $762,000 in post-tax dollars that would have been available for another type of investment.

Reduction

Paying $202,300 in taxes (15% reduction) on December 31, 2026 instead of paying $238,000 in 2018.

Exemption

Owing no additional federal capital gains tax on the $1 million in capital gains on the Opportunity Fund investment when it is sold after 10 years.

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Download the Opportunity Zone Investor Handbook

Where are Opportunity Zones?

Opportunity Zones can be found all across the country in urban, suburban and rural areas. Drawing from governmental data sources, the map below is a powerful resource for investors and real estate firms to better understand Opportunity Zones. Use the map to see how these zones are distributed throughout the U.S. or look up a specific address to find out if falls within a designated Opportunity Zone.

How do these tax benefits impact potential returns?

It’s not about how much you make, it’s about how much you keep. Use our calculator to understand how much in potential after-tax earnings you can unlock by investing in an Opportunity Fund versus a standard stock portfolio.

Tax reform includes unprecedented benefit for building in the South Bronx, Upper Manhattan and elsewhere. EquityMultiple CEO Charles Clinton and Youngwoo & Associated VP Bryan Woo discuss the new program and new opportunities for real estate investors.

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An accredited investor is someone with a net worth of at least $1 million, excluding the value of their primary residence, OR income of at least $200,000 each year for the last two years (or $300,000 combined income if married).

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1. Defer the payment of your capital gains until Dec 31, 2026

Section 1400Z-2(b)(1) of the Tax Code states that capital gains rolled into an opportunity fund within 180 days of being realized shall be included in taxable income for the year ended December 31, 2026.

2. Reduce the tax you owe by up to 15% after seven years

Section 1400Z-2(b)(2)(B) of the Tax Code states that an investor's basis in the capital gain rolled into an opportunity fund will have a step-up in basis of 10% if held for at least five years, and a step-up in basis of an additional 5% if held for at least seven years. Note, however, that as the deferred capital gain will be taxed on December 31, 2026, we expect that these holding periods would need to be satisfied prior to that date in order to receive the benefits described herein.

3. Pay zero tax on gains earned on the Opportunity Fund

The TCJA provides that, for investors who have rolled capital gains into an opportunity fund and hold that investment in the opportunity fund for a period of ten years or more, that any additional gain realized by such investor from liquidating such investment will not incur additional federal capital gains taxes. However, please note that, given the uncertainty regarding future Treasury Department guidance, each prospective investor should consult with their personal tax advisors before making any investment into an opportunity fund.

The calculator tool displays an investor’s potential after-tax returns under different scenarios making the following assumptions:

Capital gains are invested prior to December 31, 2019;

The investment is held for 10 years;

Total eligible gains of $25,000 to $1,000,000, as selected by the user;

Annual investment appreciation of of 1% to 12%, as selected by the user; and

A long-term capital gains tax rate of 23.8% - federal capital gains tax of 20% and net investment income tax of 3.8%, only taking into account tax at a federal level (not state).

Note that the performance assumptions shown are for illustrative purposes only, and are not intended to reflect the actual experience of any individual investor.

The calculations for the standard stock portfolio assume that the original gain amount selected by the user is reduced by the 23.8% tax rate described above. As a result, 76.2% of the gain amount is invested into a standard stock portfolio at the beginning of the investment terms, which then appreciates at a compounding return of 1% to 12%, as selected by the user. At the end of each holding period, the investment in the standard stock portfolio is assumed to be sold and long-term capital gains at a tax rate of 23.8% paid on the capital gains from the investment in the standard stock portfolio.

The five-year hold calculations for the Opportunity Fund are based on rolling over capital gains in an amount selected by the user, at an initially deferred tax rate of 0%, into an Opportunity Fund, with the entirety of the investment amount appreciating at a compounding return of 1% to 12%, as selected by the user, until the fifth year of the hold, at which time the initially deferred tax is reduced by 10% and the net amount is taxed at a rate of 23.8%. In addition, at the end of the holding period, when the investment is assumed to be sold, long-term capital gain at a tax rate of 23.8% is paid on the gains or profits from the investment in the Opportunity Fund itself.

The seven-year hold calculations for the Opportunity Fund are based on rolling over capital gains in an amount selected by the user, at an initially deferred tax rate of 0%, into an Opportunity Fund, with the entirety of the investment appreciating at a compounding return of 1% to 12%, as selected by the user, until the seventh year of the hold, at which time the initially deferred tax is reduced by 15% and the net amount is taxed at a rate of 23.8%. In addition, at the end of the holding period, when the investment is assumed to be sold, long-term capital gain at a tax rate of 23.8% is paid on the gains or profits from the investment in the Opportunity Fund itself.

The ten-year hold calculations for the Opportunity Fund are based on rolling over capital gains in an amount selected by the user, at an initially deferred tax of 0%, into an Opportunity Fund, with the entirety of the investment appreciating at a compounding return of 1% to 12%, as selected by the user, until December 31, 2026, at which time the initially deferred tax is reduced by 15% and the net amount is taxed at a rate of 23.8%, effectively reducing the principal invested in the opportunity fund accordingly. Thereafter, returns continue to compound at the same initial rate selected by the user of 1% to 12%. At the end of the tenth year of the holding period, the investment in the Opportunity Fund is sold and the capital gains on the investment in the Opportunity Fund itself is taxed at a rate of 0%.

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